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POB(99)4th
POST OFFICE BOARD
SEPARATE RECORD OF PROCEEDINGS
PO99/43
CHAIRMAN’S (v) The future of the Horizon programme remained uncertain.
BUSINESS Two options for its continuation had been developed.
Option A would result in the continuation of the
programme on the terms agreed with ICL in December
1998, with the benefit payment card being retained but
compulsory Automated Credit Transfer (ACT) being
introduced from 2005. This had not been agreed with the
Benefits Agency. Option B envisaged the programme
continuing but without the benefits card. POCL would in
effect become a bank, offering basic accounts accessed
through a Post Office smartcard. Existing post office
benefit customers would have to transfer to the new
account between July 2002 and June 2004. ICL would
also be compensated for the abortive work carried out
under Option A. This would consist of £50m aborted
costs, £30m for sub-contractors’ costs and £100m for
cash flow delays. Funding of compensation had not been
discussed but POCL would expect it to be met by
Treasury or DSS.
(vii) Neither Treasury nor DSS/BA supported Option A, so
Option B (or termination) was the only real way forward.
Under this option a Heads of Agreement was being
developed and Fujitsu , ICL’s parent company was,
because of disclosure implications within its report and
accounts, pressing for the document to be signed by 10
May 1999, the date on which its accounts had to be
finalised. POCL still had a number of concerns which at
this stage prevented the Head of Agreement from being
signed.
(viii) I Government were keen to avoid termination - mainly
because of the likely impact on ICL and high litigation
risks. Under any termination option POCL would not want
to move to compulsory ACT before 2005, although
DSS/BA would seek its introduction from 2001.
Termination would also pose a real threat to the
sustainability of the network. In the meantime, POCL had
developed a contingency plan for the short term provision
of service and the procurement of a replacement system.
(ix) Financially Option A remained by far the best solution for
POCL with a positive NPV of £315m. Termination, but
with the existing DSS contract continuing as now until
2005, produced a negative NPV of £(515)m and
termination without a long term DSS contract resulted in a
negative NPV of £(799)m. Option B had a negative NPV
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of £(888)m. The termination options made no allowance
for the costs that may be necessary to re-shape the
network of post offices. All POCL NPVs were based on a
discount rate of 12%.
(x) KPMG had been employed by Government to carry out a
value for money report and had based its financial
analysis on a discount rate of 6%. They had produced
quite different absolute results, although the relativities of
the options remained the same. For POCL Option A was
seen as having a positive NPV of £179m, Option Ba
negative NPV of £(966)m and to terminate had a negative
NPV of £(943)m. ICL are shown as having a negative
NPV of £(439)m under Option B which they would not be
prepared to accept, and would therefore seek to off-set
their position through charges to POCL. This would
therefore result in a negative NPV for POCL of £(1.4)bn
or over £(1.5)bn worse than Option A. Only BA returned
a positive NPV with figures ranging from £1,123m for
Option A to £2,087m for termination. KPMG had also
produced a combined NPV known as the ‘Public sector
total’. Under Option A this produced a positive NPV of
£1,266m, Option B a NPV of £399m and under
termination an NPV of £994m.
(xi) A profile of the cumulative funding requirement under
Option B showed that breakeven would only be achieved
in 2008/09 and that at its peak in 2003/04 funding would
reach £850m.
(xii) Although Option A was the best option for POCL and
provided the best value for money for the public sector.
Ministers felt it could not be delivered and were unlikely to
pursue it. Option B was a high cost, high risk option for
POCL and currently was not a commercially viable
proposition. Termination remained an option although it
was also high risk and high cost.
(xiii) If the project were to be terminated, POCL would need to
seek assurances from Government over speed of ACT
migration and impact on the network.
noted further that
(xiv) The Chairman and Chief Executive were due to meet
Stephen Byers, the Secretary of State at the DTI, on 28
April to discuss Horizon. In advance of this meeting the
Chairman would write clearly setting out the view of The
Post Office Board and in particular the essential
requirements for Option B to be progressed. These would
include a commercial case that with a balanced risk
profile, funding for the programme being provided without
detrimentally affecting other planned Post Office activities,
and the impact and timing of the costs on The Post Office
and POCL’s profit & loss account.
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(xv) The Government had published a White Paper on
‘Modernising Government’ and this included a
commitment to an automated Counters network. It was
estimated that through automation of Government
services, a potential revenue stream of between £2.5bn
and £4.5bn could be released which, if provided to POCL,
would offset the revenue lost under progressing Horizon.
A commitment from Government to release a stream of
revenue as a consequence of ‘Modernising Government’
would be sought.
(xvi) The BA benefited financially through Option B as a result
of only having to pay the cost of transferring funds by
BACS into the Post Office account. They had, however,
assumed that the High Street banks would be willing to
handle accounts for up to 19m individuals the vast
majority of whom would be low earners who would
withdraw all funds soon after the account was credited.
(xvii) I DTI remained allied to The Post Office’s recommended
solution but were isolated within Government. The
difficulties experienced with Horizon were not expected to
impact negatively on POCL’s Government Gateway
aspirations.
(xvii) To date reactive briefing had been prepared to deal with
media enquiries but contingency arrangements had been
prepared to deal with potential leaks. Members would be
provided with some historical briefing to assist with any
external enquiries they might face.
(xviii) The potential impact on the network would not at this be
set out formally to Government.
(xix) Whilst the Board could refuse to accept an uncommercial
proposal it remained within the power of the Secretary of
State to direct The Post Office to proceed. This had never
happened before and the Board would want to continue
to work constructively with all parties to try and avoid this
damaging conclusion.
(xx) Members agreed that resolving the commercial
implications remained key and understanding the degree
of certainty around the potential income from ‘Modernising
Government’ could pave the way to an agreement being
reached. In purely commercial terms it was acknowledged
that financially termination was hard to ignore although it
failed to address the fundamental issue of POCL
requiring a platform for automation.
(xxi) Approved the Chairman’s letter to Stephen Byers, which
would emphasise that Option B as currently presented
could not be supported.
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DEPLOYMENT OF PO99/47
EUROPEAN
PARCELS
STRATEGY
(POB(99)26)
(i) The Post Office’s key competitors continued to seek new
opportunities to develop internationally. The Dutch had
acquired a French company “Jet Services” in December
1998 and could provide services across the mails,
express and logistics markets. Deutsche Post had a
presence across most of Western Europe and had
recently acquired a Scandinavian company - Transoflex -
for an estimated £350m. La Poste had done little
internationally, although they had purchased a stake in
DPD a German company The Post Office had previously
considered but rejected. Through its link with General
Parcel The Post Office now had solid coverage
throughout Europe with 750 depots, 35,000 employees
and a combined turnover of £3.5bn.
(ii) The Post Office’s key ambition was to obtain a controlling
stake in General Parcel and had already taken steps
towards this through the planned acquisition of depots in
Austria. Additionally, during this first phase of
development, further acquisitions and/or partnerships in
the Netherlands, the Irish Republic and Sweden would be
sought. These investments would be funded from the
£75m agreed with Government for 1999-00 as part of the
forthcoming White Paper.
(iii) A further opportunity to acquire the French partner in
General Parcel was also being explored. This, together
with those ventures described above, would, if successful,
enable a 60% share of General Parcel to be acquired.
(iv) The second phase of development would focus on
opportunities within the Spanish, Italian and Scandinavian
markets which, if successful, would provide a 75% share
of General Parcel at an estimated investment of just
under £200m.
noted further that
(v) The completion statement for German Parcel would soon
be available and would confirm that the acquisition had
been on favourable terms. Volume was already above the
7% forecast, currently standing at 11%.
(vi) The existing German management team had proved
themselves competent and would be exposed to the
Board at an appropriate time. The ability of the team in
France was not as satisfactory and a shadow team was in
place and would replace them in the near future.
(vii) In operational terms the European road based operation
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was on a par with Deutsche Post and the Dutch.
However, The Post Office was weak on logistics and air
operations.
(viii) In future it would be appropriate for investment cases
under £10m which were uncontroversial and in line with
strategy, to be devolved to the Investment Board for
approval. On those occasions when the Board’s authority
was needed and a decision was required prior to a
scheduled meeting, a short paper would be circulated for
comment and consent.
(ix) Authorised the Investment Board to make the final
decision to authorise acquisitions in the Austrian, Dutch,
Swedish and Irish markets and that in future, subject to
the caveats in para (viii) above, cases under £10m would
be devolved to the Investment Board.
(x) Agreed that a full proposal to acquire the French partner
in General Parcel would be brought to the Board (in
correspondence, if necessary) if analysis of the proposal
supported its progression.
THE NATIONAL PO99/48
LOTTERY PROJECT
(POB(99)27)
(i) Mike Kinski declared that through Stagecoach he had a
working relationship with Richard Branson who had
previously expressed an interest in operating the lottery
licence.
(ii) The Board had previously agreed the ongoing
development of a National Lottery bid (PO98/130).
Following further analysis the Board was now being asked
to support The Post Office becoming a shareholder in
Camelot, the current licence holder, and join the Camelot
consortium bidding to win a second licence to run the
lottery from October 2001. Financially the project had an
NPV of £72m over the seven year period of the licence.
(iii) The proposed strategy was considered financially risk free
and it was widely accepted that having The Post office as
part of any bid would enhance the chances of a
consortiums’ success.
(iv) The proposal assumed that POCL would become a 20%
shareholder in Camelot through a purchase of shares
from Cadburys, De la Rue and Racal. Together with ICL,
the shareholders would each hold a 20% stake.
Negotiations currently indicated that an equity purchase
price of £19.9m and a supply contract price improvement
of £11m was a real possibility.
(v) The only significant risk identified in joining Camelot was
the negative publicity that had surrounded the lottery
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(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
operator which could tarnish The Post Office’s reputation.
However, Camelot was sensitive to the media relations
problems that had occurred during the early part of its
operation and had taken steps to distance itself from
these events.
Competition issues were not regarded as a major issue.
The Post Office had held discussions with Richard
Branson who wanted to operate the lottery on an non-
profit basis through his Branson foundation. Opportunities
for The Post Office to make a profit under this proposal
were negligible and therefore unattractive.
The lottery licence would be awarded by five
commissioners appointed by the Minister for Culture,
Media and Sports. It was expected that they would seek
to award the licence to the bid that would both increase
the level of funds paid to good causes and be financially
viable and sustainable over the licence period.
Notwithstanding the public relations difficulties Camelot
had experienced, it was widely accepted that the lottery
was successful and granting the licence to an untried
alternative bidder would be a considerable risk.
Noted further that
Whilst the lottery provided low margin returns and in
comparison to the European Strategy was not a top
priority, it was strategically important to POCL whose core
activities, such as bill payments were already under threat
and the independent automated network of lottery
terminals across the country provided a real opportunity
for competitors to exploit.
A public relations strategy had been prepared.
Funding of the equity purchase would not be required
until 2000-01.
Approved and Authorised the project team to:
* negotiate and agree the Camelot contract within the
financial parameters of the business case;
* acquire an increased shareholding (up to 5% more) on
similar terms if there is a reduction to four
shareholders;
* use a wholly owned subsidiary as a vehicle for the DTI
consent, to hold Camelot equity and receive dividend
payments.
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